In the manufacturing industry, the production of finished end products often involves the production and use of intermediate products and by-products. Raw materials are processed into an intermediate product, possibly generating one or more by-products, and the intermediate product is then processed into the finished end product, possibly generating one or more additional by-products. For example, to produce foam seating cushions, a manufacturer may combine two raw materials, an amine and a phosgene. This produces isocyanate, an intermediate product, and hydrochloric acid, a by-product. The isocyanate is then processed further to form the foam cushions.
In addition to selling finished end products, manufacturers also often attempt to sell intermediate products and by-products to other manufacturers or enterprises. This may provide additional sources of revenue. As another example, because a by-product may be a hazardous material, government regulations may prohibit the manufacturers from dumping or burning the by-product. Despite their desire to do so, many manufacturers have difficulty producing a consistent revenue stream or otherwise disposing of their intermediate products and/or by-products because they typically cannot predict customer demand for those products. Instead, the manufacturers routinely sell those products by turning the market for the products “on” and “off.” For example, when a manufacturer's quantity of a by-product is low, the manufacturer may charge an artificially high price for the by-product. This turns the market “off,” such that few if any customers are willing to purchase the by-product from the manufacturer. When the quantity of the by-product is high, the manufacturer may charge an artificially low price for the by-product. This turns the market “on,” such that many customers are willing to purchase the by-product from the manufacturer.
A problem with this approach is that the manufacturers often end up selling their intermediate products or by-products at very low prices. Because the manufacturers view customer demand for the intermediate products or by-products as highly variable, the manufacturers simply wait until the need arises and then sell these products at artificially low prices. This prevents the manufacturers from charging more reasonable prices for the intermediate products or by-products. As a result, the manufacturers often lose money in those sales, either relative to what they could have charged had they acted sooner or possibly even in absolute terms (relative to the cost of generating the intermediate products or by-products).
Another problem with this approach is that the manufacturers often do not record how different prices or contract terms affect the market for the intermediate products and by-products. The lack of recorded information often prevents the manufacturers from engaging in statistical analysis of future demand for these products, such that they cannot predict the level of customer demand for the intermediate product or by-product with any certainty. As a result, any estimates of future demand for these products often suffer from high rates of forecast error, indicating that the manufacturers often over-estimate or under-estimate the demand for these products.
In addition, the lack of accurate demand forecasts may prevent the manufacturers from running their manufacturing facilities at full capacity. Manufacturers can typically predict the demand for their finished end products, so they typically use their facilities to produce enough of the finished end product to satisfy that predicted demand. If their facilities are not running at full capacity, the manufacturers could potentially use the excess capacity to produce additional amounts of the intermediate products and by-products. However, because the manufacturers often cannot predict the demand for the intermediate products and by-products, the manufacturers may choose not to use such excess capacity in order to avoid possibly generating excess amounts of those products that then need to be disposed of in some manner. Instead, the manufacturers may run their manufacturing facilities at less than peak capacity, which reduces the amount of product that can be sold and increases the length of time it takes to recover the costs of the equipment in the facilities.
As a result of any of these or other disadvantages, previous demand planning techniques have been inadequate in many manufacturing environments.